Stakeholder Capitalism and Chrysler

Stakeholder capitalism — a market system in which companies treat the interests of all major stakeholders roughly equally, rather than explicitly favoring investors — is attracting growing interest in these recessionary times. After all, most investors risk far less than what workers risk when the latter accept a job, so why should investors get the lion's share of the reward?

The trouble with stakeholder capitalism isn't the theory itself but making it work in practice. How are managers supposed to balance the interests of stakeholders? It's not enough to say that a company should look out for workers or local communities in its decisions. That is (or should be) smart business in any kind of system. Some firms do have profit-sharing programs, but you could argue that's still just good personnel management. And even under stakeholder capitalism, it still could make sense for the long-term health of a company to shut down a factory or outsource work overseas.

The true test of any system is when conflicting stakeholder interests reach an impasse. And that's what we're seeing with the Chrysler bankruptcy. The Obama administration is using its extraordinary economic leverage to test the waters of stakeholder capitalism.

Chrysler went into bankruptcy because a group of bondholders rejected the company's (read: the government's) offer to buy their bonds at the discounted rate of about 30 cents on the dollar. Earlier, Chrysler had settled with the autoworkers' union to give it 50 cents on the dollar for what the company owed the union's pension and health care fund.

The bondholders argued that they should have gotten a better deal than the union, because their debt was secured by the company's assets and the union's was not. Bankruptcy law clearly states that courts should pay off secured creditors before moving on to other creditors.

On paper, then, the bondholders would have a strong case. But bankruptcy law gives judges some wiggle room. If a large majority of bondholders agree to the company's terms, then judges can impose the same terms on the rest of the bondholders. (And in times of pressing social needs, such as late 19th century railroad bankruptcies, courts have even put the screws to all bondholders.) As it turns out with Chrysler, most of the creditors happen to be bailout banks that have already accepted the company's offer of 30 cents. So the administration is confident that they'll quickly win the court battle with the dissenting bondholders.

Some observers in fact are saying that these remaining bondholders — who earlier said they would accept 36 cents on the dollar, already less than the union's terms — are just posturing, hoping for a better deal by dragging out the process. And most of these bondholders bought the bonds at heavily discounted levels, so their effective losses will be smaller than the union's in any case.

Still, it's easy to see how the administration might start using their control over banks to try more extensive interventions into business. The whole reason the government bailed out the banks, after all, was that they were the linchpin of the economy, so it may well have more opportunities than the Chrysler mess. We depend so heavily on easy financing to grease the wheels of efficient commerce that if Citigroup or Bank of America had failed, it might have put whole sections of the economy into disarray.

President Obama's statement on Chrysler's bankruptcy here was striking. He's a lawyer, so he knows that in principle the bondholders have a decent case for their priority as secured creditors. As the President has done with many of his other decisions, he might have carefully explained why he was favoring one group over another. (After all, the bondholders' money came mostly from the pension funds of teachers and other workers, so this isn't even a simple case of rich investors vs. suffering workers.)

Instead, he blasted the bondholders for refusing to make sacrifices in a time of distress ("I don't stand with them"). He didn't even pay lip service to their priority claim on Chrysler's assets. He made them the scapegoat for a bankruptcy he might have pushed for even had they capitulated.

What does all this mean for managers? It shows at a minimum that the President continues to believe that bashing investment funds — like bashing executives — is good politics right now. The administration is probably too moderate to go much further, but if the recession gets worse, we might see far-reaching changes affecting executives' as well as investors' claims on corporate assets. We might see the seeds of stakeholder capitalism begin to sprout.